Reverse charge VAT for construction services

HMRC's new domestic reverse charge for construction services comes into force on 1 October 2020.

From this point, a VAT-registered business that supplies certain construction services to another VAT-registered business for onward sale needs to issue a VAT invoice stating the service is subject to the domestic reverse charge.

However, the recipient must account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient may then recover the VAT as input tax, subject to the normal rules.

Unlike other types of reverse charge, the value of such reverse charge services will not count towards the VAT-registration threshold, which is good news for smaller businesses.

Specified services

The new domestic reverse charge will apply to supplies of ‘specified services'.

Among the services included are construction, alteration, repair, extension, painting and decorating, plus demolition, civil engineering and the installation of heating, lighting and air conditioning.

Some services will not fall within the scope of the domestic reverse charge.

Where there is a reverse charge element anywhere in a supply chain, however, then the whole supply may be subject to the domestic reverse charge.

Preparation

Construction businesses will need to ensure their accounting systems are capable of processing reverse charge supplies.

As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a risk that suppliers will still account for the VAT to HMRC in error and likewise customers will still recover it from HMRC.

Subcontractors that rely on VAT collected from their customers as working capital until they have to remit it to HMRC are likely to suffer from the loss of cashflow.

These businesses will need to consider if payment terms need to be revisited to avoid any problems in the supply chain this could cause.

Before these new rules take effect construction businesses should:

review supplies provided to and received from other VAT-registered contractors to establish where these will be subject to a reverse charge from October 2020

obtain notification from customers, with details of their VAT-registration status, construction industry scheme status, and confirmation that they are the end-user

consider any adaptations required to ensure accounting systems can deal with this change

reflect on the negative effect on cashflow from October 2020, and ways to mitigate it.